5 Ways For Parents To Pay For College

Most forms of financial aid are made in your student’s name, like scholarships, grants and federal student loans like the Stafford and Perkins Loan. You’ll want to use free money, like college scholarships and grants, first. Federal student loans, like the Perkins and Federal Stafford Loan, are the least expensive next options. Once you have maximized free money and federal student loans, parents generally must decide how to cover the remaining college expenses. We’ve put together a college parent checklist that takes you step-by-step through the financial aid process if you want to learn more.

parent and child

Here are some pros and cons on the most common financial vehicles that parents use to pay for college. You may want to take this information into consideration when reviewing your college financing options.

Parent PLUS Loan

Federal Parent PLUS Loans are the only true “financial aid for parents.” Parent PLUS Loans help parents pay for college by allowing them to borrow up to the total cost of attendance of their child minus any other financial aid received. PLUS loans are credit based loans so you do have to have good credit to qualify.

Parent PLUS Loans
Potential positives
Parent PLUS Loans
Potential negatives
Federal loan benefits like deferment and forbearance.Loan in your name, not your child’s.
Simple interest.Fixed interest rate of 8.5% with private lender; 7.9% with Department of Education.
Various repayment options.

Private Student Loans

Private student loans are credit-based education loans made in the student’s name. Most undergraduate students will need a parent to co-sign in order to get approved for a private loan.

Private Student Loans
Potential positives
Private Student Loans
Potential negatives
Loan in your child’s name, not yours.You will likely need to co-sign on the loan, meaning you are also responsible for repayment.
If you have good credit, you may receive a lower interest rate and fees than the PLUS Loan.If you have poor credit, your child might not be approved or your child’s loan may have a high interest rates and fees.
Student generally does not have to repay until after graduation.Interest rates are often variable and can rise if market interest rates go up.
Some lenders offer co-signer release programs.

Cash and Savings

If you have cash and savings on-hand to pay for your child’s college, you can potentially save hundreds or thousands of dollars that you would have paid in student loan interest. However, in this economy, it would be a good idea to make sure that you have enough saved to cover your family’s expenses in case you lose your job or in the event of an emergency. If you are unsure whether you want to utilize your cash and savings, you might consider taking out a PLUS Loan or a private student loan and paying it off when things are more secure. Neither of these two student loan options has a pre-payment penalty.

401k or Home Equity Loans

Before the stock market and housing decline, many parents had sufficient equity to utilize 401k funds and home equity loans to pay for their child’s college education. Unfortunately, many families have lost tremendous value in their home and 401k account, so this may no longer be a viable option.

401k Loans
Potential positives
401k Loans
Potential negatives
You pay yourself back the interest on 401k loans funds you borrow.The interest you pay is not deductible and is using after tax dollars.
Loans need to be repaid after 5 years. If you quit your job or get laid off, loans have to be repaid immediately. Should this occur, there are also tax consequences for not repaying the loan in addition to the 10% penalty.
Your 401k account may have limits on the amount you can borrow.
Home Equity Loans
Potential positives
Home Equity Loans
Potential negatives
You may obtain a lower interest rate than other loan options if you have good credit.If your home has declined in value, you may not have enough equity to borrow against.
Home equity loans have become harder to get approved for.

Credit cards

Although it may be tempting to some to put your child’s tuition on a credit card to “earn points” or because “it’s easier ” than filling out all those applications, this is probably the most expensive option unless you plan to pay the balance in full immediately. Credit cards carry high interest rates and a slew of fees and penalties. Even if you have a low promotional interest rate, that rate generally only lasts for a short period of time. Unless you are sure that you can pay the balance before it begins to accrue interest, it’s better to apply for a loan designed specifically to pay for college than to charge it.